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Quarterly report filed by small businesses

10QSB

August 18, 2003

SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
Form 10-QSB
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934.
For the quarterly period ended June 30, 2003
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934.
For the transition period from _______ to ______
Commission file number 001-15673
FRONTLINE COMMUNICATIONS CORPORATION
(Exact name of small business issuer as specified in its charter)
Delaware 13-3950283
(State or other jurisdiction (I.R.S employer
of incorporation or organization) identification number)
One Blue Hill Plaza, P.O. Box 1548, Pearl River, New York 10965
(Address of principal executive offices) (Zip code)
(845) 623-8553
(Issuer's telephone number, including area code)
Indicate by a check mark whether the Issuer: (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding twelve months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the last 90 days.
Yes [X] No [ ]
As of August 13, 2003 there were outstanding 11,123,305 shares of the Issuer's
common stock, $ .01 par value.

Notes to Condensed Consolidated Financial Statements (Unaudited)
June 30, 2003
NOTE A- BASIS OF PRESENTATION
On April 3, 2003, Frontline Communications Corporation (the" Company')
completed the acquisition (see Note B) of all of the issued and outstanding
stock of Proyecciones y Ventas Organizadas, S.A. de C.V., a corporation
organized under the laws of the Republic of Mexico ("Provo"). Provo and its
subsidiaries are engaged in selling and distribution of prepaid calling cards
and cellular phone airtime in Mexico. As consideration, the Company issued
220,000 shares of its Series C Convertible Preferred Stock ("Series C
Preferred") to the two stockholders of Provo.
The accompanying unaudited consolidated financial statements have been
prepared treating the Company as the acquirer and the results of operations of
Provo are included from the date of acquisition. The purchase price for the
acquisition is established using the Company's common stock value at the time
the acquisition was signed and announced and by applying the conversion ratio of
the Series C Preferred shares issued to the former stockholders of Provo.
Each share of Series C Preferred will automatically convert into 150
shares of the Company's common stock upon approval of the conversion by the
Company's shareholders. In the event that, the Company's shareholders do not
approve conversion of Series C Preferred, the Company will be obligated to pay
$20 million to the former stockholders of Provo. The Company has assessed the
likelihood of it paying this amount as very improbable and has not given any
effect of this amount in the accompanying financial statements or factored it in
valuing the acquisition.
The accompanying unaudited consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-QSB and Item 310 (b)
of Regulation S-B. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments (consisting
of normal recurring accruals) considered necessary for fair presentation have
been included. The results for the interim periods are not necessarily
indicative of the results that may be attained for an entire year or any future
periods. For further information, refer to the Financial Statements and
footnotes thereto in the Company's annual report on Form 10-KSB for the fiscal
year ended December 31, 2002 and to the audited financial statements of Provo
filed with the Company's Form 8K/A. There have been no significant changes in
accounting policies since December 31, 2002.
The condensed consolidated financial statements include the accounts of
the Company and its subsidiaries. All significant intercompany accounts and
transactions have been eliminated.
-4-

NOTE B- PROVO ACQUISITION
In April 2003, the Company entered into an amended and restated stock
purchase agreement with the two stockholders of Proyecciones y Ventas
Organizadas, S.A de C.V., a corporation organized under the laws of the Republic
of Mexico ("Provo"), to acquire from them all the issued and outstanding shares
of Provo. As consideration, the Company issued 220,000 shares of its Series C
Convertible Preferred Stock ("Series C Preferred") to the two stockholders of
Provo ("Sellers").
Each share of Series C Preferred will automatically convert into 150
shares of the Company's common stock after the transaction is approved by the
Company's shareholders. In connection with the transaction, the Company will
require shareholder approval for (i) issuance of common stock upon conversion of
Series C Preferred, (ii) an increase in authorized common stock to 75,000,000
shares, and (iii) a reverse split of all of the issued and outstanding shares of
common stock. Upon such approval, Series C Preferred will convert into common
stock representing approximately 64% of the combined company.
In the event the Company's shareholders do not approve the conversion
of Series C Preferred into the Company's common stock on or prior to August 20,
2003 or such later date as agreed to by the holders of a majority of Series C
Preferred ("Conversion Date"), (which date shall be extended for a period of up
to 30 days due to actions or inactions of Securities and Exchange Commission or
American Stock Exchange), the compensation payable to the Sellers will be
increased by $20 million, payable in the form of a Note (the "Acquisition
Note"). The Acquisition Note is a $20 million principal amount promissory note
issued to the Sellers in connection with the acquisition, which only becomes due
and payable only if the Series C Preferred is not converted into Frontline's
common stock on the Conversion Date. The Acquisition Note is secured by
substantially all of Frontline's assets including the shares of capital stock of
Provo and its subsidiaries sold to Frontline.
In connection with the acquisition, the Company issued 35,500 Series D
Convertible Preferred Stock Preferred shares ("Series D Preferred"), including
27,500 shares to officers and employees and 8,000 shares to brokers and finders.
Each share of Series D Preferred can be converted into 150 shares of the
Company's common stock after shareholder approval is obtained for (i) the
issuance of the shares of common stock upon conversion of the Series D
Preferred, (ii) an increase in the Company's authorized common stock to
75,000,000 and (iii) a reverse split of the common stock.
The purchase price for accounting purposes is established using the
fair market value of 33,000,000 of the Company's common stock (to be issued upon
conversion of 220,000 shares of Series C Preferred issued to the Sellers) valued
at $0.204, which represents the average quote market price of the Company's
stock, as reported by the American Stock Exchange, during the time between when
the acquisition was signed and when it was announced. Fair value of common stock
to be issued upon conversion of
Series C Preferred $6,732,000
Acquisition related costs
Fair value of 1,200,000 shares of common stock to be
issued upon conversion of 8,000 shares of Series D
Preferred issued to brokers and finders 218,363
Other estimated transaction costs 500,000
----------
Total purchase price $7,450,363
==========
-5-

The fair values of Provo's assets and liabilities have been estimated,
principally based on book values, for the purpose of allocating the purchase
price of the acquisition. A summary of assets acquired, liabilities assumed and
resulting goodwill is as follows:
Book values of Provo's assets $ 13,315,129
Book values of Provo's liabilities and minority interest (11,208,507)
Goodwill, costs in excess of net assets acquired 5,343,741
------------
Total purchase price $ 7,450,363
============
The foregoing allocation of the purchase price is preliminary. The actual
purchase price allocation to reflect the fair values of assets acquired and
liabilities assumed will be based upon management's ongoing evaluation.
Accordingly, the final allocation of the purchase price may differ significantly
from the preliminary allocation.
The Company has adopted Statement of Financial Accounting Standard No.
142," Goodwill and Other Intangible Assets" ("SFAS NO. 142"). In accordance with
the statement, goodwill associated with this transaction will not be amortized,
but will be periodically assessed for impairment. Such an assessment will be at
least on an annual basis.
The accompanying pro forma operating statements are presented as if the
Provo acquisition occurred on January 1, 2002. The pro forma information is
unaudited and is not necessarily indicative of what the actual results of
operations of the Company would have been assuming the acquisition had been
completed as of January 1, 2002 and neither is it necessarily indicative of the
results of operations for future periods.
Six months ended June 30 2003 2002
------------------------ ---- ----
Revenues $ 41,187,403 $ 53,486,890
Net loss (490,390) (1,007,427)
Net loss per share- basic and diluted ($0.01) ($0.02)
The weighted average number used to calculate the net loss per share includes
33,000,000 shares of common stock to be issued upon conversion of 220,000 shares
of Series C Preferred issued in connection with the Provo acquisition and
5,325,000 shares of common stock to be issued upon conversion of 35,500 shares
of Series D Preferred issued to officers, employees, brokers and finders in
connection with the Provo acquisition.
-6-

NOTE C- LOSS PER SHARE
The Company follows SFAS No. 128, "Earning per Share", which provides
for the calculation of "basic" and "diluted" earning per share ("EPS"). Basic
EPS includes no dilution and is computed by dividing income or loss available to
common shareholders by the weighted - average number of common shares
outstanding for the period. Diluted earnings per share reflect the potential
dilution that could occur through the effect of common shares issuable upon
exercise of stock options and warrants and convertible securities. Potential
common shares have not been included in the computation of diluted loss since
the effect would be antidilutive. However, 33,000,000 shares of common stock to
be issued upon conversion of the 220,000 shares of Series C Preferred issued in
connection with the Provo acquisition and the 5,325,000 shares of common stock
to be issued upon conversion of 35,500 shares of Series D Preferred issued to
officers, employees, brokers and finders in connection with Provo acquisition
are included in the computation of the weighted- average number of common shares
outstanding
If the shares of common stock to be issued upon conversion of Series C Preferred
and Series D Preferred are excluded from the calculation of the weighted average
number of shares, the net loss per common share for the three and six months
ended June 30, 2003 would have been $0.10 and $0.13, respectively.
NOTE D- ADOPTION OF NEW ACCOUNTING LITERATURE
The Company does not believe that any other recently issued, but not
yet effective, accounting standards, if currently adopted, will have a material
effect on the Company's consolidated financial position or results of
operations.
NOTE E- STOCK OPTIONS
Statement of Financial Accounting Standard No. 123 requires the Company
to provide pro forma information regarding net loss and net loss per share as if
compensation cost for the stock options had been determined in accordance with
the fair-value based method prescribed in SFAS No. 123. For the three- and six-
periods ended June 30, 2003 and 2002, the pro forma net loss and loss per share
calculated under the provisions of SFAS No. 123 would have been the same as the
reported numbers.
NOTE F- DEBT
In April 2003, the Company borrowed $550,000 from an unaffiliated
entity (the "Lender") and issued a secured promissory note (the "Note") to the
Lender. The Note bears interest at the rate of 14% per annum and is secured by
substantially all of the Company's assets. Two officers have pledged shares of
the Company's common stock owned by them to the Lender as additional collateral
for this loan. The Note was payable on July 2, 2003 and by mutual agreement, the
repayment date was extended to August 1, 2003. The Company is currently
negotiating with the Lender to extend the repayment date. In connection with the
financing, the Company issued 500,000 shares of common stock (fair market value
of approximately $ 105,000) to the Lender as additional consideration. In
addition, the Company incurred approximately $84,413 in related expenses. The
aggregate amount of $189,413 was deferred as financing cost and was amortized
over the initial term of the Note.
In April 2003, the Company paid $200,000 to settle a promissory note,
issued as a part of a business acquisition, in the principal amount of $728,600.
The balance of the promissory note was settled through issuance of 375,000
shares of the Company's common stock (fair market value of approximately
$78,750) to the promissory note holders. Upon settlement, the Company recognized
a gain on debt settlement of approximately $449,850 during the three months
ended June 30, 2003.
-7-

NOTE G - STOCKHOLDERS EQUITY.
In April 2003, the Company issued 500,000 shares of its common stock in
connection with a borrowing and issued 375,000 shares of common stock for a
settlement of a debt (see Note F).
In connection with the Provo acquisition, the Company issued 220,000
shares of Series C Preferred to the Sellers and issued 35,500 Series D
Preferred, including 27,500 shares to officers and employees and 8,000 shares to
brokers and finders. Each share of both the classes of preferred shares
automatically convert into 150 shares of the Company's common stock after the
Company's shareholders approve the conversion. The par value and the liquidation
preference of each share of Series C Preferred and Series D Preferred are $.01.
In the accompanying consolidated financial statements the value of the
outstanding Series C Preferred and Series D Preferred is determined based on the
Company's common share price on the relevant dates and by applying the ratio in
which Series C Preferred and Series D Preferred can be converted into shares of
common stock. Accordingly, 220,000 outstanding shares of Series C are valued at
$6,732,000 and the 35,500 shares of Series D Preferred are valued at $968,985.
Out of this amount $218,363 representing the value of Series D Preferred issued
to brokers and finders is treated as part of the transaction cost and the
balance of $750,622 representing the fair market value of Series D shares issued
to officers and employees is charged as noncash compensation during the three
months ended June 30, 2003.
NOTE H - OTHER COMMENTS
1. We report our operations in two segments: Internet business in the U.S.A and
Sale and distribution of prepaid phone cards in Mexico
The Company's Internet business provides Internet access, web hosting, website
design and related services to residential and business customers.
The Company's Mexican subsidiary, Provo, sells and distributes prepaid phone
cards in Mexico for Telmex and Telcel. Telmex is the dominant telecommunications
provider in Mexico and Telcel is the dominant provider of cellular airtime in
Mexico. Prepaid phone cards are distributed through a vast network of retail
outlets, including convenience stores, drug stores, restaurants, lottery stands,
newspaper and magazine stands and other general stores.
Segment information for the three and six months ended June 30 is as follows:

For the three and six months ended June 30, 2003 the Internet business includes
$750,622 of noncash compensation charge and approximately $210,000 of common
corporate expenses.
2. The Company has determined that for its subsidiary's operations in Mexico,
the Mexican peso is the functional currency. Assets and liabilities denominated
in the Mexican peso are translated into U.S dollars at the rates in effect at
the balance sheet date. Revenues and expenses are translated at average rates
for the reported period. The net exchange difference resulting from these
translations are recorded as a separate component of the stockholders' equity as
accumulated other comprehensive income, which is excluded from net income. For
the three and six months ended June 30, 2003, the Company recorded a translation
gain of $58,848 to its stockholders equity as accumulated other comprehensive
income.
3. The Company's Mexican subsidiary subcontracts personnel services from an
entity affiliated with one of the directors of the Company. During the three
months ended June 30, 2003, the subsidiary paid approximately $637,000 for such
services. The Company believes that the terms it obtained from the affiliated
entity was no less favorable than what it would have obtained form an
unaffiliated party. In addition, during the three months ended June 30, 2003,
the Mexican subsidiary sold prepaid cards to entities affiliated with one the
directors of the Company in the aggregate amount of approximately $263,000 under
normal trade terms.
NOTE I - SUBSEQUENT EVENTS
In July 2003, the Company entered into a common stock purchase
agreement with Fusion Capital Fund II, LLC, whereby, subject to the Company's
receipt of necessary approvals and satisfaction of other applicable conditions,
Fusion Capital has agreed to purchase up to $13 million of the Company's common
stock over a 40-month period. In connection with the agreement the Company
issued 500,000 shares of its common stock to Fusion Capital as a commitment fee.
In July 2003, the Company entered into a consulting agreement for
operational services and issued to the consultant 120,000 shares of common stock
as a consideration for the services to be rendered by the consultant. The fair
value of the shares issued will be charged to operations over the term of the
consulting agreement.
In July 2003, the Company sold to Fusion Capital Fund II, LLC a
convertible promissory note ("Note") in the principal amount of $110,000. The
Note bears interest at 10% and is payable on December 31, 2005. Fusion Capital
has the option to convert the principal amount of the Note into shares of the
Company's common stock at a conversion price of $.25 per share. In connection
with the sale, the Company issued to Fusion Capital warrants to acquire 220,000
shares of its common stock at an exercise price of $0.42.
In August 2003, the Company sold to an unaffiliated individual 333,333
share of its common stock for $100,000. In addition, the Company issued the
individual warrants to acquire 150,000 shares of its common stock at an exercise
price of $0.40
-8-

I

tem 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
Safe Harbor Statement under the Private Securities Litigation Reform
Act of 1995: The statements contained in this Item 2 and elsewhere in this Form
10-QSB that are not historical facts are "forward looking statements" within the
meaning of Section 27A of the Securities Act of 1933, as amended and Section 21E
of the Securities Exchange Act of 1934, as amended. These "forward looking
statements" are subject to a number of known and unknown risks, uncertainties
and other factors that may cause our actual results, performance or achievements
to be materially different from any future results, performance or achievements
expressed or implied by such forward looking statements. Such risk factors
include, but are not limited to, the following: risks associated with our
ability to attract and retain new subscribers to integrate newly acquired
subscribers and business entities into our operations, and to manage any future
growth; uncertainties regarding our future operating results; risks relating to
changes in the market for internet services, regulatory and technological
changes, our possible inability to protect proprietary rights, changes in
consumer preferences and demographics, competition and our reliance on
telecommunication carriers; risks relating to our ability to expand our network
structure and to obtain any necessary future financing; risks relating to
unfavorable general economic conditions, uncertainty of customer and supplier
plans and commitments; risks related to our acquisition of Provo and our ability
to maintain the American Stock Exchange listing of our securities; and other
risks detailed in this report and in our other Securities and Exchange
Commission filings. The words "believe", "expect", "anticipate", "intend" and
"plan" and similar expressions identify forward-looking statements, which speak
only as of the date they were made. We undertake no obligation to update any
forward-looking statements contained in this report.
Provo Acquisition
On April 3, 2003, we completed the acquisition of all of the issued and
outstanding stock of Proyecciones y Ventas Organizadas, S.A. de C.V., a
corporation organized under the laws of the Republic of Mexico ("Provo"). Provo
and its subsidiaries are engaged in distribution of prepaid calling cards and
cellular phone airtime in Mexico. The acquisition was accounted for using the
purchase method of accounting with the results of the acquisition included in
the consolidated financial statements from the acquisition date.
Overview
Prior to acquiring Provo in 2003 and during 2002, a significant part of
our revenues were derived from providing Internet access services to individuals
and businesses. These revenues were comprised principally of recurring revenues
from our customer base, leased line connections and various ancillary services.
We charge subscription fees, which are billed monthly, quarterly, semi-annually
or annually in advance, typically pursuant to pre-authorized credit card
accounts. The balance of our revenues during those periods were derived from
website design, development and hosting services.
Monthly subscription service revenue for Internet access is recognized
over the period in which services are provided. Fee revenues for website design,
development and hosting services are recognized as services are performed.
Deferred revenue represents prepaid access fees by customers.
-9-

Provo's primary business is the sale and distribution of prepaid phone
cards in Mexico. Provo sells and distributes Ladatel payphone calling cards,
Multifon prepaid telephone time for Telmex and prepaid PCS cellular airtime for
Telcel, all of which are collectively referred to as prepaid phone cards. Telmex
is the dominant telecommunications provider in Mexico and Telcel is the dominant
provider of cellular airtime in Mexico. Provo's management believes that they
account for nearly 7% of all sales of prepaid phone cards in Mexico.
Prepaid phone cards are distributed through a vast network of retail
outlets, including convenience stores, drug stores, restaurants, lottery stands,
newspaper and magazine stands and other general stores. Provo purchases large
volumes of prepaid cards from Telmex or Telcel and sells the cards in smaller
quantities to retailers either directly or through agents or distributors.
Provo purchases prepaid cards at a discount from the face value of the
card, and resells them to retailers or distributors at a slightly lower
discount. The difference between the two discount rates, typically from 1% to 7
%, represents the gross margin Provo retains. Cash (C.O.D) purchases result in a
higher discount to Provo compared to purchases on credit terms from Telmex or
Telcel. In addition, the discount obtained by Provo varies by the type of card,
face value of the card and volume levels met. Similarly, the discount offered by
Provo to retailers or distributors varies by the type of card, face value of the
card and volume levels of the retailer or distributor. Accordingly, the gross
margin attained by Provo in any period is impacted by several factors. In
addition, Telmex and Telcel provide Provo additional discount and rebates based
on certain special programs. Provo's management tries to optimize the gross
margins earned by balancing volume levels with its working capital availability,
and from time to time has scaled back volume levels due to working capital
constraints.
Restructuring Program
In October 2000, we initiated a restructuring program designed , among
other things, to reduce our operating losses. The program consisted of
reductions of personnel and marketing and promotional expenses, consolidation of
certain operations, exit from certain marginal product lines not related to our
core business and closure of regional offices. The restructuring program was
substantially completed by December 31, 2002.
We believe that the restructuring program and related cost reductions,
will permit us to maintain service quality to our customers while our more
focused product offering portfolio will enhance our ability to grow our revenue
base. To date we have realized significant cost reductions. However, there can
be no assurance that the restructuring program will achieve the desired results,
that it will not give rise to any disruption of any services offered by us, or
resulting loss of revenues from reduced product lines and marketing
expenditures.
-10-

Results of Operations
Comparison of three and six months ended June 30, 2003 and 2002:
Revenues. Our revenues increased for the three and six months ended June 30,
2003 by $19,285,025 or 1,498.5%, and by $18,998,883 or 719.9%, respectively over
the same periods of the prior year. The increases in revenues were due to the
Provo acquisition. Excluding the acquisition, revenues decreased for the three
and six months by $299,743 or 23.3% and by $585,885 or 22.2%, respectively over
the same periods of the prior year. The decrease in revenues was in part due to
the closure of our unprofitable satellite offices and due to the reduced amount
of website development work we performed in 2003.
Cost of Revenues. For the three months ended June 30, 2003, our cost of
revenues increased by $18,477,577 to $19,125,583. For the six months ended June
30, 2003, our cost of revenues increased by $18,291,444 to $19,621,304. The
increase in cost of revenues was due to the Provo acquisition. Cost of revenues
as a percentage of revenues for the three months and six months ended June 30,
2003 were 93.0% and 90.7%, respectively, compared to 50.4% and 50.4%,
respectively, in 2002. In percentage terms of revenues, cost of Provo's products
are generally higher than ours, and with a greater mix of Provo's share in our
consolidated revenues, cost of revenue as a percentage of revenues is expected
to increase. Excluding Provo's operations, our cost of revenues as a percentage
of revenues for the three and six months ended June 30, 2003 were 48.8% and
47.6%, respectively, compared to 50.4 and 50.4%, respectively in 2002. The
decrease in cost of revenues as a percentage of revenues was due to cost
reductions realized through our continued focus on network cost reductions.
Selling, General and Administrative. For the three months ended June 30, 2003,
selling, general and administrative expenses increased by $936,696 compared to
the same period of the prior year. As a percentage of revenues, selling, general
and administrative expenses decreased from 49.1% in 2002 to 7.6% in 2003. For
the six months ended June 30, 2003, selling, general and administrative expenses
increased by $872,653 compared to the same period of the prior year. As a
percentage of revenues, selling, general and administrative expenses decreased
from 49.2% in 2002 to 10.0% in 2003. The absolute dollar increase in selling,
general and administrative expenses was principally due to the Provo
acquisition. In terms of percentage of revenues, Provo has a lower selling,
general and administrative expenses structure than ours, and with a greater mix
of Provo's share in our consolidated revenues, selling, general and
administrative expenses as a percentage of revenues are expected to decrease.
Depreciation and Amortization. For the three months ended June 30, 2003,
depreciation and amortization decreased by $40,699 to $152,758. For the six
months ended June 30, 2003, depreciation and amortization decreased by $91,588
to $296,131. Depreciation and amortization decreased as many of our long-lived
assets are fully depreciated or amortized over their estimated useful life.
Interest Expense. Interest expense for three months ended June 30, 2003 was
$193,931 compared to an interest expense of $22,177 during the comparable period
in 2002. Interest expense for the six months ended June 30, 2003 was $215,819
compared to an interest expense of $43,720 during the comparable period in 2002.
Interest expense for the three and six months ended June 30, 2003 increased
compared to the same periods of the prior year principally due to the increased
debt level that resulted from the Provo acquisition.
-11-

Income Taxes. Represent Provo's tax expense, as determined in accordance with
Mexico's income tax laws. The effective tax rate was higher than the statutory
rate of 34% due to certain non-deductible expenses and due to certain revised
estimates on deferred taxes.
Net loss. As a result of the foregoing and after recognizing $499,850 gain on
debt settlement and recording a noncash compensation of $750,662, for the three
months ended June 30, 2003, net loss increased by $736,938 to $941,544 compared
to a net loss of $204,616 for the corresponding period in 2002. For the six
months ended June 30, 2003, net loss increased by $720,571 to $ 1,139,371
compared to a net loss of $418,800 in the comparable period in 2002.
Liquidity and Capital Resources
Our working capital at June 30, 2003 was $ 747,463 compared with a
working capital deficiency of $ 2,655,722 at December 31, 2002. The increase in
working capital was primarily due to approximately $3.6 million of additional
working capital that resulted from the Provo acquisition.
Our primary capital requirements are to fund Provo's working capital.
To date, we have financed our capital requirements primarily through issuance of
debt and equity securities. The availability of capital resources is dependent
upon many factors, including, but not limited to, prevailing market conditions,
interest rates, and our financial condition.
At June 30, 2003, Provo had aggregate borrowings of $ 1,917,792 under
four lines of credit with two banks. The lines are secured by real estate owned
by family members of Provo's former majority stockholders . At June 30, 2003,
the current interest rates on the lines range between 9.5% and 10%. The lines
expire at various dates between July 2004 and September of 2005 and one line
requires a monthly payment of approximately $14,000 in 2003.
Historically, Provo relied on Telmex to finance its inventory purchases
with a line of credit. In March of 2003, Provo restructured its credit line with
Telmex. At June 30, 2003, we owe Telmex approximately $7.4 million. Of the
balance, approximately $ 3.8 is payable in September of 2003 and the balance of
$3.6 million will be payable in 54 monthly installments commencing in July of
2003.
In April 2003, the Company borrowed $550,000 from an unaffiliated
entity (the "Lender") and issued a secured promissory note (the "Note") to the
Lender. The Note bears interest at the rate of 14% per annum and is secured by
substantially all of the Company's assets. Two officers have pledged shares of
the Company's common stock owned by them to the Lender as additional collateral.
The Note was payable on July 2, 2003 and by mutual agreement, the repayment date
was extended to August 1, 2003. The Company is currently negotiating with the
Lender to extend the repayment date.
We plan to raise additional financing. The availability of capital
resources is dependent upon prevailing market conditions, interest rates and our
financial condition. In July 2003, we entered into a common stock purchase
agreement with Fusion Capital Fund II, LLC, whereby, Fusion Capital has agreed
to purchase up to $13 million of our common stock over a 40-month period. The
transaction is subject to satisfaction of several conditions and there can be no
assurance that we will in fact complete the transaction.
-12-

Based on current plans, management anticipates that the cash on hand,
cash flow from operations and vendor credit will satisfy our capital
requirements through at least the end of 2003, apart from our capital
requirements relating to the following debt obligations. Our agreement with
Telmex requires us to repay Telmex $3.8 million in September of 2003. In
addition, we are required to repay $550,000 due under bridge financing on August
1, 2003. We currently lack the funds to pay these obligations when they become
due. Therefore, in order to satisfy our debt obligations, we are currently
pursuing additional sources of financing. There can be no assurance, however,
that such financing will be available on terms that are acceptable to us, or on
any terms.
Critical Accounting Policies and Estimates
Our discussion and analysis of our financial conditions and results of
operations is based upon our financial statements, which have been prepared in
accordance with accounting principles generally accepted in the United States of
America ("GAAP"). The preparation of these financial statement requires us to
make estimates and judgments that affect the reported amounts of assets,
liabilities, revenues and expenses, and related disclosure of contingent assets
and liabilities. On an ongoing basis, we evaluate our estimates, including those
related to revenue recognition, accounts receivable, long-lived assets and
income taxes. We base our estimates on historical experience and on various
other assumptions that are we believe to be reasonable under the current
circumstances, the results of which form the basis for making judgments about
the carrying values of assets and liabilities that are not readily apparent from
other sources. Actual results may differ from these estimates under different
assumptions or conditions.
We believe the following critical accounting policies affect our
significant judgment and estimates used in preparation of our consolidated
financial statements.
Revenue Recognition. A part of our revenues are derived from providing Internet
access to individuals and businesses. These revenues consist principally of
recurring revenues from our customer base, leased line connections and various
ancillary services. We charge subscription fees, which are billed monthly,
quarterly, and semi-annually or annually in advance, typically pursuant to
pre-authorized credit card accounts. Monthly subscription revenue for Internet
access is recognized over the period in which services are provided. Fee revenue
for website design, development and hosting services are recognized as services
are performed. Deferred revenue represents prepaid access fees paid by
customers.
We recognize prepaid phone cards revenues in accordance with generally accepted
accounting principles as outlined in SAB No. 101, which requires that four basic
criteria be met before revenue can be recognized: (1) persuasive evidence of an
arrangement exists; (2) product delivery, including customer acceptance, has
occurred; (3) the price is fixed or determinable; and (4) collectibility is
reasonably assured. We believe that its revenue recognition policy is critical
because revenue is a very significant component of its results of operations.
Decisions relative to criteria (4) regarding collectibility are based upon
management's judgments and should conditions change in the future and cause
management to determine these criteria are not met; our recognized results may
be affected.
-13-

Accounts Receivable. Accounts receivable are reported at their outstanding
unpaid principal balances reduced by an allowance for doubtful accounts. We
estimate doubtful accounts based on historical bad debts, factors related to
specific customers' ability to pay, and current economic trends. We write off
accounts receivable against the allowance when a balance is determined to be
uncollectible. With respect to prepaid phone cards business, we perform ongoing
credit evaluations of our customers and adjust credit limits based upon our
customers' payment history and current credit worthiness, as determined by a
review of their current credit information. We continuously monitor collections
and an allowance for estimated credit losses is maintained based upon our
historical experience and any specific customer issues that have been
identified. While such credit losses have historically been within management's
expectation and the allowances that have been established, there cannot be any
guarantee that the credit loss rates will not change in the future. In this line
of business, we have a limited number of customers with individually large
amounts due at any balance sheet date. Any unanticipated change in one of those
customer's credit position could have a material effect on our results of
operations in the period in which such changes or events occur.
Long-Lived Assets. We assess the impairment of long-lived assets, which include
property and equipment, intangibles and customer bases when events or changes in
circumstances indicate that the carrying amount of the assets may not be
recoverable through the estimated undiscounted future cash flows from the use of
those assets. When any such impairment exists, the related assets will be
written down to fair value.
Inventory. Inventory consists of prepaid phone cards, purchased for resale.
Inventory is valued at the lower of cost ("first-in, first-out") or market. On a
periodic basis, management compares the amount of inventory on hand and under
commitment with our latest forecasted requirements to determine whether
write-downs for excess inventory are required. Although management considers the
amounts on hand to be realizable, there can be no assurance that these amounts
will prove to be realizable over time.
Income Taxes. Income taxes are accounted for under the asset and liability
method. Deferred tax assets and liabilities are recognized for future tax
consequences attributable to differences between the financial statements
carrying amounts of existing assets and liabilities and their respective tax
bases and operating loss and tax credit carry forwards. Deferred tax assets and
liabilities are measured using the enacted tax rates expected to apply to
taxable income during the period in which those temporary differences are
expected to be recovered or settled. Deferred tax assets are periodically
evaluated to determine their recoverability, and where the recovery is not
likely, a valuation allowance is established. In the event that actual results
differ from management's estimates or assumptions change, the provision for
income taxes could be materially impacted.
Real Estate Held for Sale. Our real estate held for sale represents
non-operating assets, purchased or acquired in settlement of trade accounts
receivable and are valued at the lower of cost or market. Although management
considers the amounts to be realizable, there can be no assurance that these
amounts will prove to be realizable over time.
-14-

I

tem 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
Our management, including our chief executive officer and chief financial
officer, have carried out an evaluation of the effectiveness of our disclosure
controls and procedures as of June 30, 2003, pursuant to Exchange Act Rules
13a-15(e) and 15(d)-15(e). Based upon that evaluation, our chief executive
officer and chief financial officer have concluded that as of such date, our
disclosure controls and procedures in place are adequate to ensure material
information and other information requiring disclosure is identified and
communicated on a timely basis.
Changes in Internal Control Over Financial Reporting
During the period covered by this report, there have been no changes in our
internal control over financial reporting that have materially affected or are
reasonably likely to materially affect our internal control over financial
reporting
-15-

PART II
OTHER INFORMATION

Item 2. Changes in Securities and Use of Proceeds
Recent Sales of Unregistered Securities
During the three months ended June 30, 2003, the Company
issued 500,000 shares of its common stock to a lender and
issued 375,000 to a note holder as a settlement. In addition,
the Company issued 220,000 shares of its Series C Convertible
Preferred Stock for an acquisition and issued 35,500 Series D
Convertible Preferred Stock ("Series D Preferred"), including
27,500 shares to officers and employees and 8,000 shares to
brokers and finders in connection with the acquisition. The
foregoing shares were issued pursuant to exemptions from
registration under Sections 3(a)(9) and 4(2) of the Securities
Act of 1933.

Item 6. Exhibits and Reports on Form 8-K
a) Exhibits:
31 (a) Certification of the Chief Executive Officer
pursuant to Section 302 of the Sarbanes-Oxley Act of
2002
31 (b) Certification of the Chief Financial Officer
pursuant to Section 302 of the Sarbanes-Oxley Act of
2002
32 (a) Certification of Periodic Financial Report by
Chief Executive Officer Pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002 and 18 U.S.C Section
1350, furnished herewith
32 (b) Certification of Periodic Financial Report by
Chief Financial Officer Pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002 and 18 U.S.C Section
1350, furnished herewith
b) Reports on Form 8-K:
During the three months ended June 30, 2003, the
Company filed:
(i) an 8-K for the event dated April 3, 2003
under Items 2 and 7 to report it's
acquisition of all the issued and
outstanding shares of Proyecciones y Ventas
Organizadas, S.A de C.V., a corporation
organized under the laws of the Republic of
Mexico ("Provo"). The Company filed an
amendment to the foregoing 8-K under Item 2
to file certain Addendum to the agreement.
The Company also filed an amendment to the
foregoing 8-K under Item 7 to file certain
financial statements and pro forma
information concerning the acquired
business.
(ii) an 8-K for the event dated May 16, 2003
under Item 4 to report changes in its
certifying accountant.
-16-

Exhibit 31(a)
CERTIFICATION
I, Stephen J. Cole-Hatchard, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Frontline
Communications Corporation.;
2. Based on my knowledge, this report does not contain any untrue
statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial
information included in this report, fairly present in all material
respects the financial condition, results of operations and cash flows
of the registrant as of, and for, the periods presented in this
report;
4. The registrant's other certifying officer(s) and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the
registrant and have:
(a) Designed such disclosure controls and procedures, or caused
such disclosure controls and procedures to be designed under
our supervision, to ensure that material information relating
to the registrant, including its consolidated subsidiaries,

is
made known to us by others within those entities, particularly
during the period in which this report is being prepared;
(b) Evaluated the effectiveness of the registrant's disclosure
controls and procedures and presented in this report our
conclusions about the effectiveness of the disclosure controls
and procedures, as of the end of the period covered by this
report based on such evaluation; and
(c) Disclosed in this report any change in the registrant's
internal control over financial reporting that occurred during
the registrant's most recent fiscal quarter (the registrant's
fourth fiscal quarter in the case of an annual report) that
has materially affected, or is reasonably likely to materially
affect, the registrant's internal control over financial
reporting; and
5. The registrant's other certifying officer(s) and I have disclosed,
based on our most recent evaluation of internal control over financial
reporting, to the registrant's auditors and the audit committee of the
registrant's board of directors (or persons performing the equivalent
functions):
(a) All significant deficiencies and material weaknesses in the
design or operation of internal control over financial
reporting which are reasonably likely to adversely affect the
registrant's ability to record, process, summarize and report
financial information; and
(b) Any fraud, whether or not material, that involves management
or other employees who have a significant role in the
registrant's internal control over financial reporting.
Date: August 19, 2003
/s/ Stephen J. Cole-Hatchard
---------------------------------------
Chief Executive Officer

Exhibit 31(b)
CERTIFICATION
I, Vasan Thatham, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Frontline
Communications Corporation.;
2. Based on my knowledge, this report does not contain any untrue
statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial
information included in this report, fairly present in all material
respects the financial condition, results of operations and cash flows
of the registrant as of, and for, the periods presented in this
report;
4. The registrant's other certifying officer(s) and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the
registrant and have:
(a) Designed such disclosure controls and procedures, or caused
such disclosure controls and procedures to be designed under
our supervision, to ensure that material information relating
to the registrant, including its consolidated subsidiaries, is
made

known to us by others within those entities, particularly
during the period in which this report is being prepared;
(b) Evaluated the effectiveness of the registrant's disclosure
controls and procedures and presented in this report our
conclusions about the effectiveness of the disclosure controls
and procedures, as of the end of the period covered by this
report based on such evaluation; and
(c) Disclosed in this report any change in the registrant's
internal control over financial reporting that occurred during
the registrant's most recent fiscal quarter (the registrant's
fourth fiscal quarter in the case of an annual report) that
has materially affected, or is reasonably likely to materially
affect, the registrant's internal control over financial
reporting; and
5. The registrant's other certifying officer(s) and I have disclosed,
based on our most recent evaluation of internal control over financial
reporting, to the registrant's auditors and the audit committee of the
registrant's board of directors (or persons performing the equivalent
functions):
(a) All significant deficiencies and material weaknesses in the
design or operation of internal control over financial
reporting which are reasonably likely to adversely affect the
registrant's ability to record, process, summarize and report
financial information; and
(b) Any fraud, whether or not material, that involves management
or other employees who have a significant role in the
registrant's internal control over financial reporting.
Date: August 19, 2003
/s/ Vasan Thatham
--------------------------------
Chief Financial Officer

Exhibit 32(a)

Certification of Periodic Financial Report by
Chief Executive Officer Pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002
and 18 U.S.C. ss. 1350
I, Stephen J. Cole-Hatchard, Chief Executive Officer of Frontline
Communications Corp. (the "Company"), certify that:
(1) The Company's Quarterly Report on Form 10-Q for the quarterly period
ended June 30, 2003 (the "Report") fully complies with the requirements
of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
(2) the information contained in the Report fairly presents, in all
material respects, the financial condition and results of operations of
the Company.
/s/ Stephen J. Cole-Hatchard
---------------------------------------
Stephen J. Cole-Hatchard
Chief Executive Officer
Frontline Communications Corp.
August 19, 2003

A signed original of this written statement required by Section 906 has
been provided to Frontline Communications Corp. and will be retained by
Frontline Communications Corp. and furnished to the Securities and Exchange
Commission or its staff upon request.

Exhibit 32(b)

Certification of Periodic Financial Report by
Chief Financial Officer Pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002
and 18 U.S.C. ss. 1350
I, Vasan Thatham, Vice President and Chief Financial Officer of Frontline
Communications Corp. (the "Company"), certify that:
(1) The Company's Quarterly Report on Form 10-Q for the quarterly period
ended June 30, 2003 (the "Report") fully complies with the requirements
of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
(2) the information contained in the Report fairly presents, in all
material respects, the financial condition and results of operations of
the Company.
/s/ Vasan Thatham
----------------------------------------
Vasan Thatham
Vice President and
Chief Financial Officer
Frontline Communications Corp.
August 19, 2003

A signed original of this written statement required by Section 906 has
been provided to Frontline Communications Corp. and will be retained by
Frontline Communications Corp. and furnished to the Securities and Exchange
Commission or its staff upon request.